Something old and something new will help the audio industry beat the blues in the second half.
Something old is component audio, the market segment upon which the hi-fi and home-theater audio businesses were built. Their sales plummeted in 2003 but turned around beginning late last year despite flat retail traffic, in large part because component retailers adopted a more aggressive stance in displaying and merchandising the high-margin products, suppliers contend. Marketers also cited continued custom-installation growth, more user-friendly receiver designs, décor-friendly speakers, and plummeting flat-panel display pricing, which is freeing up consumers' disposable income for the purchase of pricier home-theater audio components.
Something new that will likely lift home- and portable-audio sales in the second half and fourth quarter include:
- Headphone music portables that use flash memory or a hard disk drive (HDD) to store tunes. By 2005, their dollar sales will exceed headphone CD player sales, according to CEA forecasts.
- Networked and HDD-equipped HTiBs. Sales will be driven largely by the marketing clout of Bose, which recently launched its first such systems.
- HTiBs with DVD/VCR combos, two-speaker surround and plasma-friendly designs (including models with wall-hanging speakers and electronics).
Although overall HTiB sales are expected to rise in units in 2004, dollar volume could decline for the full year, in part because of an expected second-half proliferation of $99 systems from major CE suppliers, who will join marketers of Chinese-made HTiBs, suppliers said.
HTiBs [excluding two-channel shelf systems] almost outsold component audio for the first time in 2003, but given components' resurgence starting late last year, components might defend their top position as the products of choice for home theater audio. In fact, some suppliers project a decline in HTiB dollar sales this year following several years of strong growth.
In 2003, factory-level HTiB sales rose 7.3 percent to $961 million, while component audio sales [excluding standalone DVD-Audio/Video and SACD players] shrank about 18 percent to $981 million.
This year, things are different, suppliers agreed. Components are on the upswing for several reasons, not just because they hit rock bottom last year, they contend. One is that, simply, "retailers are doing a much better job of selling components," said Klipsch president Paul Jacobs. "Clearly, retailers got a lot more focused in the past year on creating step-up [home-theater audio] offerings." The trend, involving training and component-based home-theater displays, started over a year ago, but after last fall, "everyone focused on it," he said.
As part of their component strategies, retailers are packaging component audio with high-definition video displays at a single price and offering to set up component-based home theater systems in consumers' homes to eliminate consumer frustration.
Retailers who are creating and demonstrating component A/V packages include American TV and H.H. Gregg, said Paul Bente, president of Harman Consumer Group's loudspeaker division.
"All major component audio retailers are moving to prepackaged A/V solutions to present the audio side of the video sale," said Yamaha's sales VP Steve Caldero. "The days of picking a receiver, speakers and CD player doesn't have much appeal to consumers today. People want to see how the system integrates in the home, want to see it all working together, and want it easy to operate." Single-price component-based A/V systems on display range from about $3,000 to $30,000, he said.
Retailers are "taking some of the pain out of it," added Jacobs. "Time is valuable to people. Make it easy for them to make the decision."
Falling prices on flat-panel video displays are also fueling the component turnaround, Jacobs contended. "People who were predisposed to buy a $5,000 flat-panel might buy a $500 HTiB. Now you can have a component audio system and flat-panel at $5,500."
Sensing the opportunity for such component-based home theater packages, JBL and Jamo have launched the industry's first "home-theater-in-a-crate" systems. JBL's $15,000 Cinemavision system, available only through custom channels, features 50-inch HD plasma, DVD-receiver and components speakers that include on-wall speakers that can also be stand-mounted.
Also aiding component sales in the second half: a greater selection of receivers and speakers designed to integrate with flat-panel displays, as well as features that make receivers simpler to set up and use. Yamaha's Caldero pointed to receivers that up-convert composite and S-video to component video. This feature lets consumers run only one video cable instead of two or three from a receiver to a TV, making it unnecessary to switch among video inputs when selecting a video source.
For the second half, suppliers see $500 receivers continuing to increase their share of the receiver market, given the level of features they're now offering. A $500 receiver today packs 7.1-channel decoding and amplification, Dolby Pro Logic IIx and DTS Neo:6, automatic room equalization, and up-conversion of composite to S video, Caldero said. A year and a half ago, those features would've cost $1,000, he said.
Salespeople are using composite-to-component up-conversion to upsell, Caldero said. "Salespeople are grabbing onto it."
Forecasts of component speakers for the year and second half vary, with the most optimistic suppliers expected an increase of only two or three percentage points for the year. Whatever their assessment, most agree that the custom-installation channel is responsible for whatever growth there is in the overall speaker market, which comprises in-wall and in-ceiling speakers, as well as traditional box speakers. "Custom drives the majority of growth," said JBL's Bente. "Year-on-year, I expect out-the-door retail sales of speakers will be flat in dollars, with units slightly down."
While custom-installed speakers continue their upward climb, select segments of the box-speaker market are also growing. They include flat speakers that cosmetically integrate with flat-panel displays. "Flat speakers will be big in the fourth quarter," said Jacobs.
With these shifts in mind, JBL and sister brand Infinity plan the fourth-quarter shipments of a flat on-wall speaker that also snaps into an in-wall bracket for flush mounting. The design targets both the new-construction and post-construction markets, said Bente. Surface-mounted on a wall, the speaker will protrude about four inches, about the same depth as a flat-panel display.
For its part, Klipsch ships its first flat on-wall speaker in the fourth quarter.
(Projected changes in second- half year-over-year dollar sales of major product segments